Multichannel Retailing Chapter 3 Multichannel Retailing McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Benefits Provided by Different Channels

More Reasons for Becoming a Multi-Channel Retailer - Increase Share of Wallet Example: Eddie Bauer, single-channel customers spend $100-$200 per year, dual-channel customers spend $300-$500 per year, tri-channel customers spend $800-$1000 per year - Overcome Limitations of Existing Format - Expand Market - Provide services more cost-efficiently - Leverage Existing Assets - Brand Name, Inventory, Customer Database - Develop Insights in Customer Shopping Behavior

Dollars spent at different channels: Average annual dollars spent by JCPenny’s customers

Unique Benefits Provided by Store Channel Browsing Touching and feeling Personal service Cash and credit payment Entertainment and social interaction Immediate gratification Risk Reduction (c) Brand X Pictures/PunchStock Royalty-Free/CORBIS

Benefits Provided by Catalog Channel Convenience Information Safety Hoby Finn/Getty Images

What’s the Big Deal About Shopping on the Internet? Just 6% of total retail sales, but is growing very fast (about 25% annually) Furthermore, it has an important impact on other channels 75% of US consumers say they sometimes get information or shop online prior to visiting a regular store 49% purchase from a different retailer offline than researched online 61% of US auto consumers use the Web to research their car purchases.

What’s the Big Deal About Shopping on the Internet? Source: Forrester, State of Consumers and Technology, 2006

Internet Channel Broader Selection More and Better Information to Evaluate Merchandise Drill Down as Much as You Want Full motion Video Personalization Information is tailored to Individual consumers to help them make quicker and better purchase decisions Customized Information -- Side By Side Comparisons, Full Motion Video Try It On Virtually Information for Solving Problems, Not Just Merchandise Characteristics Virtual Communities

What People Buy Over the Internet Travel PC/Electronics/Toys Books/Software Apparel Home & Garden Jewelry & Watches

What Merchandise Will Be Sold Successfully Through Electronic Channel? “Look and See” attributes vs. “Touch and Feel” attributes (?) Degree to which information can be used to predict satisfaction prior to purchase Gifts Services Might not need to “Touch and Feel” “Touch and Feel” not useful - Gifts Superior presentation of “Touch and Feel” Branding

How to Sell Over the Internet …and eliminate returns How Can the Electronic Channel Overcome Limitations? Branding: National brands provide a consistent experience for customers to overcome not being able to touch and feel. How to Sell Over the Internet …and eliminate returns

How Can the Electronic Channel Overcome Limitations? Use technology to convert “touch and feel” information into “look and see” information 3-D Imaging Zoom Technology Live Chat 360 Degree Viewing Virtual Models conversion rates: % of consumers who buy the product after viewing it Technology increases conversion rates

How Can the Electronic Channel Overcome Limitations? The Electronic Channel Provides Superior Benefits for GIFTS Saves time Saves effort in packing Saves effort in delivery SERVICES No Shipping Problems Examples Travel websites Banking Newspapers Janis Christie/Getty Images

Evolution Toward Multichannel Retailing Traditional store-based and catalog retailers are placing more emphasis on their electronic channels and evolving into multichannel retailers. E-channel gives a way to overcome limitations of existing format With electronic channel, retailers can reach out to new markets Builds share of wallet E-channel enables retailers to give insights into customers’ shopping behaviors

Overcoming Existing Format Size of the store is the greatest constraint for stores By blending store with internet-enabled kiosks, retailers expand assortments offered to shoppers. Store based retailers face inconsistent execution Kiosks can be used by both sales associates and customers for up-to-date product information, stock information and price reduction on clearances.

Capabilities for Multi-Channel Retailing To effectively operate and realize the benefits of multi-channel retailing, firms need to have skills in: Developing assortments and managing inventory Managing employees in distant locations Distribute merchandise efficiently from DCs to stores Present merchandise in catalogs Present merchandise on websites Process orders electronically Efficient distribution of individual orders to homes Operate information systems for all channels

Who Has These Critical Resources Who Has These Critical Resources? Capabilities for Multi-Channel Retailing

Resources Needed to Compete Effectively in Internet Retailing Exciting and easy to use the website Management Information Systems Order processing and status Customer database Personalization software But these resources were not enough!

Resources Needed to Compete Effectively in Internet Retailing Retailing Skills Managing inventory Editing assortment Efficient Fulfillment Systems Significant costs - last mile Picking and packing individual orders Handling returns - reverse distribution Strong Brand Name and Image Build traffic Reduce customer perceived risk Complementary Merchandise One stop shopping Lower shipping costs Availability of Customer Information Tailored presentations - personalization

Why did Electronic-only Retailers Fail? They had skills in web design They had skills in systems to manage transactions They did not have skills in brand recognition They did not have skills necessary to build consumer trust They did not have skills to build assortments, manage inventory and fulfill small orders to homes They did not posses sufficient resources to evolve into multichannel retailers

Catalog Retailers can Add Electronic Channel Easily Ready to take orders Able to pack merchandise Able to deliver Able to handle returned merchandise Already have a database Visual merchandise for catalog is the same for electronic Steve Cole/Getty Images

Why are store-based retailers evolving into multi-channel retailers? Sales through an electronic channel are growing at over 20% per year Adding an electronic channel creates immediate possession utility Multi-channel retailers can attract more customers and satisfy existing customers better The growth of sales in stores is declining

Ecommerce Myths Low Cost of Entry Overestimate Importance of Technology, Under Estimated Need for Traditional Resources First Mover Wins Gets Rid of the Middleman

Which Channel Is the Most Profitable Which Channel Is the Most Profitable? Cost Drivers in Stores and Electronic Retailers Stores Electronic Retailers Bricks and Mortar, Salespeople Attracting Customers to Store Distribution Centers Restocking Returned Merchandise Building,Refreshing Web Site Attracting Customers to Web Site: “Customer-Acquisition Costs” are huge but “Customers’ switching costs” are tiny. Picking, Packing, Mailing Small Orders to Home Restocking Returned Merchandise Few e-tailers are profitable

Will Electronic Channel’s Low Search Cost Increase Price Competition? Conventional Wisdom Greater Comparison Shopping Offerings Easily Compared on Price Lower Search Costs => More Emphasis on Price Empirical Evidence Substantial Price Dispersion Lower Search Costs for Quality Information=> Less Price Sensitivity Lower Search Costs Lead to Better Decisions

Will Manufacturers Bypass Retailers and Sell Directly to Consumers? Advantages of Retailers vs. Manufacturers Distribute Merchandise Directly to Customers Provide Assortments Collect and Use Information about Customers Widespread Disintermediation Unlikely

Issues in Multi-Channel Retailing Integrated Shopping Experience Communicate with customers anytime, anywhere through multiple channels Website, Store, Kiosks, Handheld Devices Integrating legacy systems for seamless customer interface Brand Image Consistent brand image across different channels Merchandise assortment offered in each channel Pricing across channels

Channels Offer Complementary Benefits Stores Internet Catalog Known Entity Entertaining/ Social Experience Easy Checkout and Returns Personal Assistance Product Trial- Complementary Merchandise Immediate Gratification Location Convenience Speed Greater Selection Personalized Presentation Community Portability High Quality Visual Presentation

Multichannel Shopping

Opportunities to Enhance Multi-Channel Experience Order on Internet, Pick-Up in Store Promote Web Site on Receipts, Shopping Bags Product Availability in Stores Available on Website Kiosk in Stores to Order Merchandise Not Available in Stores Plan Purchases (Shopping List) on Website In-Store Events Promoted on Website Ad Curricular on Website

Integration – Key to Multi-Channel Retailing Shopping Experience